Dollar Climbs on Safe-Haven Demand from Middle East Tensions

The dollar index (DXY00) Tuesday rose by +0.40% and posted a 1-1/2 week high. Escalating Middle East tensions boosted safe-haven demand for the dollar Tuesday after Iran launched a missile attack against Israel.  The dollar also has carryover support from Monday when Fed Chair Powell said the FOMC is in no hurry to cut interest rates.  In addition, weakness in the euro boosted the dollar after EUR/USD slid to a 2-1/2 week low Tuesday after Eurozone consumer prices rose at the slowest pace in 3-1/2 years.  Tuesday’s US economic news was mixed for the dollar.

The US Aug JOLTS job openings rose +329,000 to 8.04 million, showing a stronger labor market than expectations of 7.693 million.

The US Sep ISM manufacturing index was unchanged from Aug at 47.2, weaker than expectations of an increase to 47.5.  The Sep ISM prices paid sub-index fell -5.7 to a 9-month low of 48.3, weaker than expectations of 53.5. 

US Aug construction spending unexpectedly fell -0.1% m/m, weaker than expectations of +0.2% m/m.

The markets are discounting the chances at 100% for a -25 bp rate cut at the November 6-7 FOMC meeting and at 40% for a -50 bp rate cut at that meeting.

EUR/USD (^EURUSD) Tuesday fell by -0.58% and posted a 2-1/2 week low. The euro came under pressure Tuesday after Eurozone Sep CPI rose +1.8% y/y, the slowest pace in nearly 3-1/2 years and below the ECB’s 2% target, which bolsters expectations for the ECB to cut interest rates at the October 17 policy meeting.  The euro extended its losses Tuesday on dovish comments from ECB Governing Council member Rehn, who said easing inflation pressures and a deteriorating Eurozone economy support the case for the ECB to cut interest rates this month.

The Eurozone Sep S&P manufacturing PMI was revised upward by +0.2 to 45.0 from the previously reported 44.8.

The Eurozone Sep CPI eased to +1.8% y/y from +2.2% y/y in Aug, right on expectations and the slowest pace of increase in almost 3-1/2 years.  Sep core CPI eased to +2.7% y/y from +2.8% y/y in Aug, right on expectations.

Swaps are discounting the chances of a -25 bp rate cut by the ECB at 93% for the October 17 meeting and at 100% for that -25 bp rate cut at the December 12 meeting.

USD/JPY (^USDJPY) Tuesday rose by +0.01%.  The yen fell slightly Tuesday after the BOJ’s September 20 policy meeting summary showed a few policymakers said the BOJ has time to watch financial markets and the global economy before making its next policy move. 

The yen recovered most of its losses Tuesday after the escalation of Middle East tensions sparked safe-haven demand for the yen.  The yen also garnered support from Tuesday’s better-than-expected Japanese Tankan and unemployment reports, hawkish factors for BOJ policy.  In addition, lower T-note yields Tuesday were bullish for the yen.

The Japan Q3 Tankan large manufacturing business conditions index was unchanged at 13 from Q2, slightly stronger than expectations of a decline to 12.

The Japan Aug jobless rate fell -0.2 to 2.5%, showing a stronger labor market than expectations of 2.6%.

The Japan Sep Jibun Bank manufacturing PMI was revised upward by +0.1 to 49.7 from the previously reported 49.6.

Japan's chief currency official Mimura said excessive forex moves are undesirable and that he will take action if the situation calls for it.

Swaps are pricing in the chances for a +10 bp rate hike by the BOJ at 3% for the October 30-31 meeting and at +23% for that +10 bp rate hike at the December 18-19 meeting.

December gold (GCZ24) Tuesday closed up +30.90 (+1.16%), and December silver (SIZ24) closed up +0.284 (+0.90%).  Precious metals rallied moderately on Tuesday as the escalation of Middle East tensions boosted the safe-haven demand for precious metals.  Israel mounted “targeted ground raids” into Lebanon against Hezbollah militants on Tuesday, and Iran launched missiles at Israel. 

A decline in global bond yields on Tuesday also supported precious metals.  Gold is also climbing after Eurozone Sep CPI rose at the slowest pace in 3-1/2 years, boosting the chances for an ECB interest rate cut later this month.  Silver prices garnered support Tuesday after the Eurozone Sep S&P manufacturing PMI and the Japan Sep Jibun Bank manufacturing PMI were revised higher, bullish factors for industrial metals demand.

Tuesday’s rally in the dollar index to a 1-1/2 week high limited gains in precious metals.  Gold also had some negative carryover from Monday when Fed Chair Powell said the FOMC was in no hurry to cut interest rates.

More Forex News from Barchart

• Will the Dollar Index Hold 100- Does it Matter?
• Dollar Strengthens on Middle East Tensions and a Weak Euro
• Barchart- Commodity Market Roundup: September’s Top Performers and Underperformers
• Dollar Gains and Gold Falls as Powell Says Fed in No Hurry to Cut Rates

On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.